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The Pension Jungle: Your money – their money. Can we trust the politicians?
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November 2nd, 2014
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This article is more than 10 years old.
Steen has vast experience as a pension and benefit strategy consultant for major international corporations and high-flying individuals. He was the managing director of Mercer when they first opened an office in Denmark. He possesses a profound understanding of different pension cultures. He is a truly independent professional and blogs at pensions-junglen.dk.
Will the money be there for you one day? Well, that depends on your viewpoint. Danes don’t have a tradition for employer-sponsored retirement plans granting future benefits.
It is more a case of you paying some and your employer paying some. Fundamentally it is all your money. Even the employer part – it is a part of your total remuneration. The money is deposited in your pension account, under your name. It follows you automatically during your working life. A simple and reassuring arrangement.
(Photo: Colourbox)
Not so simple
However there is a third party. The state. Or the politicians who run things. They think they have a share in your pension money. Why? Because contributing for later retirement is generally supported by tax deductions. Some 40 percent of the accumulated 4,000 billion kroner of pension savings will fall back to the state in the form of taxes.
The politicians think the state suffers a cash outlay. Some of this money would be nice to have right now. “The money actually belongs to the state,” are words we hear more and more.
Rocking the boat
There should be a broader understanding here. It takes some incentive to make working men and women bind part of their cash remuneration for many decades. All states know this, and we see all kinds of tax incentives around the world. Paying a low tax on annual returns might be enough incentive, but remember, most states do not tax these annual returns at all.
It is rocking the boat when the state starts tempting pension savers to pay their taxes prematurely at a lower tax rate of 37.3 percent.
Resist temptation
Real sustainability lies in the fact that future taxes on pension savings paid in due course is a guarantee that the state has future income to fund other commitments such as the state social security, folkepension.
Lump sum pensions will soon be a thing of the past, by which time the Danish state will have engulfed 80 billion kroner in premature pension taxes. Let the temptation to bring forward more taxation on pensions stop here.
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